The Big Crash
On Monday October 19, 1987, I was in Toronto attending a financial conference while the stock market crashed. I desperately wished I had been in my office to witness the events of the day…the best I could do was join the growing mob gathered around the only Reuters machine in the hotel and watch the action. I had bought out-of-the-money bond call options on Friday thinking that the sharp tumble in bond prices (rising yields) had gone far enough…but as the stock market crashed on Monday the bond market fell limit down…I was glad I was only long calls instead of long futures…but the crash, with the Dow down over 500 points on huge volume, was unbelievable. After the close the only thing on everybody’s mind was, “What’s going to happen tomorrow?”
From January to August 1987 the Dow had gained about 40%. The bull market that had begun 5 years earlier in the summer of 1982 had seen the Dow triple and, of course, it was such a strong bull market that everything, including the junk, was going up. There was little fear in the market and anyone who counseled caution was laughed at. But the market peaked in late August and began to slide. There was a currency crisis brewing, and interest rates were rising. The week before the crash the Dow fell a record 240 points, and then the dam broke on October 19.
The market opened higher Tuesday morning but quickly sold off and made new lows…everybody held their breath…but then it turned around and the Dow was up 100 points on the day…on even bigger volume than Monday…and the worst was over, although at the time you couldn’t be sure of that. Two years later, in August 1989, the Dow finally traded above its pre-crash highs.
I gave my scheduled speech to a shell-shocked audience on Tuesday afternoon and took a cab to the airport. I was scheduled to fly to Chicago for business meetings but the crash had so unnerved me that I was afraid to go…I imagined the market crashing further…social order breaking down…being trapped in Chicago as the city went dark…and I decided that it would be safer to fly back home to Vancouver. I called the over-night desk and sold my bond calls for 10 times what I had paid for them on Friday but there was little joy in the trade. My world had been changed forever…my naïve assumptions about the level of risk in the market had been shattered…and forevermore I would truly understand that you could lose everything in an instant.
I think it was the speed of the crash that stunned everyone. The Dow fell 770 points (30%) in 4 days after rallying for 5 years…confidence had turned to fear and panic in a heartbeat…where a few days earlier everything looked rosy now everything was suspect.
We’ve had a few scary crashes since 1987…the summer of 98, 9/11, 2002, 2008, even the summer of 2011…and each time I got that awful feeling that maybe this time we were really going to take a hit. The big crash in 1987 made me forever skeptical of bullish enthusiasm…I’ve seen confidence turn to panic in a heartbeat…I’ve seen the illusion of market savvy proved to be a very dangerous thing…I’ve seen the market do something that was beyond anyone’s wildest dreams…and I suspect that I’ll see something like that again. Be careful out there.
Current Market Views:
This week’s action in stocks, commodities, currencies and interest rates has strengthened my view that we had a “blow-off top” in the risk-on trades following the global round of “Q.” I’m trading accordingly, and I think there is a decent risk that we could get some downside momentum.